The BSE benchmark ended at 18799, higher by 132 points and the Nifty ended at 5640, up 32 points.
Banking was the star performer of the day, with the BSE bankex adding more than 2% at 12977.
And even the rise in the food inflation did nothing to dent the market's enthusiasm.
For the food inflation rose 11.47% from the previous week's annual rise of 10.86%, while the fuel price index remained unchanged at 12.71% per cent in the year to August 28.
The primary articles price index was up 15.40 per cent, compared with week-ago's reading of 15.19 per cent. And the wholesale price index rose 9.97% in July from a year earlier.
The Reserve Bank of India will have its first mid-quarter policy review on September 16 and one would have to see if the central bank continues its hawkish monetary policy stance.
After being plagued by nervousness in the previous session, the Asian stocks bounced back to end largely in the green; Shanghai and Taiwanese markets were the sole exceptions.
European shares have edged higher in mid-day trades on the back of strength in mining and banking stocks as an ECB member expressed optimism on the economy.
And Wall Street had a decent session of trade overnight, with the Dow rising 46 points at 10,387 and Nasdaq Composite climbing 19 points at 2,228.